Human capital and passion
Time and time again, passion has been cited as the key ingredient that drives venture performance. Like Paul Graham from Y Combinator states, “We thought when we started Y Combinator that the most important quality would be intelligence. That’s the myth in the Valley. And certainly, you don’t want founders to be stupid. But as long as you’re over a certain threshold of intelligence, what matters most is passion.” Passion is what motivates people, the “fire of desire” that makes entrepreneurs pursue their dreams and make the impossible possible. Also academic work repeatedly confirms that entrepreneurial passion boosts persistence and creativity. Thus, we know that passion is important in explaining entrepreneurial success. But is it more important than prior experience, skills and knowledge – so called human capital? And what happens if team members experience different levels of passion? Can passion also lead to negative outcomes? These were the key questions driving one of the studies that I’ll talk about today. Specifically, the main objective of this study was to examine whether and how rational (human capital) and affective (passion) team member characteristics interact in predicting venture performance.
The results of the study show that entrepreneurial teams with greater human capital do not necessarily perform better. Instead, the positive impact of their human capital is dependent upon the teams’ passion and the extent to which team members share a common vision for the strategy of the company.
These findings make a lot of sense. Let’s take the example of Mike, a friend of mine who is working for a venture capital firm. Mike recently told me about a potential investment, a software company, that he was very excited about. Let’s call it Clocker. When Mike read about Clocker and received the company materials, he was thrilled to meet the team. In addition to the interesting financials, the founding team’s track record was outstanding. The founder and CEO had in depth industry knowledge, worked in the software space for years and led the product division for Salesforce. The CFO graduated from Harvard, had worked for Bain & Company before joining Clocker and showed very strong financial and strategic skills. The VP of Sales was a typical sales tiger who’d worked as an account manager for Microsoft. Finally, the fourth team member was very hands-on, a serial entrepreneur with a successful exit on his resume and some experience with start-up failures. On paper, the team seemed to have all that it would take to successfully scale up Clocker and ensure a nice return on the potential investment. You’ll understand why Mike was very excited to meet the Clocker team.
Nevertheless, when the team members presented their pitch in the boardroom and elaborated on the Clocker growth strategy, Mike was disappointed. The story just didn’t hold. While the founder told Mike that he wanted to expand to the USA and become the next Salesforce, the CTO did not seem to share this passion and ambition. He dismissed the founders’ ideas immediately and argued that he would be too busy with other projects to realize global expansion this year. The problem? The Clocker team members had very different ambitions and goals in mind for Clocker and were not equally passionate about the company. Because of these differences in passion team members did not communicate efficiently and failed to share their knowledge, which ultimately led to a decrease in their performance. Not surprisingly, the Clocker team soon after broke up.